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Economics

$A > Why the sudden decline?

MEconomicsMO

So I may have a vested interest in seeing the Australian dollar stay strong.

No, it’s nothing sinister.

I’m heading to Europe later this year, so I want value for money.

Over the past few days, the Australian dollar has fallen against most of the major currencies, including the Euro and the US dollar.

Let’s use the Australian dollar / US dollar exchange for the basis of this discussion because that performance has been tracking that of the Australian dollar / Euro.

The Aussie hit a high this year, of around US$1.08 in mid-February, and it has been steadily losing ground because of a number of factors. Those losses have accelerated over the past few days.

In fact, the Aussie is down around US2c since Tuesday morning.

There are three main reasons for that.

The first is an appreciating US dollar.

There’s an increasing view, that the American economy is recovering. There has been some promising data recently, topped off by the Federal Reserve’s decision overnight, not to stimulate the economy unless it is needed. That alone adds to confidence that the US may be growing organically.

Secondly, there are fears our economy is slowing. Today’s trade deficit of $480million was worse than expected, as imports fell 4 per cent, and exports declined 2 per cent. While the gap is narrowing, as St George economists said today, there are concerns Australia may not be benefiting from the resources boom as much as first thought. Taking a simplistic view would suggest lower imports means weakening demand locally, while a fall in exports may imply waning international demand for our products although as ANZ points out, today’s fall was driven by unusally sharp declines in rural and coal exports, along with weakening commodity prices.

Thirdly, the Australian dollar took a bit of a hit yesterday following the Reserve Bank board’s decision to leave interest rates on hold. Usually, that would mean the Australian currency rises because the interest rate differential remains wide, making Australian investments for foreign players more appealing.

The problem this time, was that the RBA confirmed that rates may be cut if we got a benign read on inflation.

NAB economists say an underlying rate of less than 0.8 per cent should lock in an offical cash rate cut in May. The CPI numbers will be out towards the end of this month.

So it seems currency market traders are looking ahead, forcing the value of our currency lower for now.

What can stop it from falling?

In a note earlier today, ANZ economists said that China is the only obvious potential saviour.

Chinese markets have been closed over the past few days.

Traders will be looking to a positive open tomorrow, or for China to ease policy, to arrest this broadening decline in the Australian dollar.

Now I ponder, do I stock up my cash card with foreign currency now, or do I wait?

It’s a good question, and one I’ll tackle in another blog entry.

How’s that for a tease?

MEMO>ricardo

 

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